Section 56-591.1. Stranded Costs
A. For purposes of this section and Section 56-593, the term "generating assets" includes generating units owned by a public utility, and the term "purchase power contracts" means contracts in which a public utility is obligated to buy generating capacity from another company, including, but not limited to, another public utility or another company that is not a public utility.
B. If the Commission determines that a public utility will not be able to influence unduly the price of electricity after competition for retail generation sales is permitted, the Commission shall determine and establish methodologies to produce just and reasonable rates and charges to allow the public utility an opportunity to recover its just and reasonable net stranded costs, or to return to its customers any just and reasonable net stranded benefits, resulting from:
1. the difference between the market value of its generating assets and its gross investment, less accumulated depreciation (i.e., "net investment"), in such assets, provided that the market value shall be determined by the Commission considering the results of the actual sale of all or a portion of the utility's interest in such generating assets in arm's length transactions, and
2. the difference between the (i) market value of its purchase power contracts and (ii) the accumulated future capacity payments (and any other verifiable, fixed, non-mitigable obligations) required by the public utility to be paid under such contracts, provided that the market value shall be determined by the Commission considering the results of the actual sale of all or a portion of the utility's interest in such purchase power contracts in arm's length transactions.
C. In determining just and reasonable net stranded costs, and in determining and establishing methodologies to produce just and reasonable rates and charges to permit a public utility an opportunity for their recovery, the Commission shall balance the interests of the public utility's customers, its investors, and the public. The Commission may take the following factors into account:
1. the degree to which the relevant market for electric generation is effectively competitive,
2. the degree to which the public utility has fostered the development of an effectively competitive market for electric generation,
3. the degree to which the utility has minimized the total costs that it seeks to recover as just and reasonable net stranded costs, and
4. any other factors deemed by the Commission to be in the public interest.
C. A public utility seeking the opportunity to recover just and reasonable net stranded costs shall bear the burden of proof in establishing before the Commission such costs and the methodologies to produce just and reasonable rates to recover them.
DRAFTING NOTES
Proposed Section 56-591.1 ("Stranded Costs") is intended to establish standards to permit a utility an opportunity to recover just and reasonable net stranded costs or to return to its customers just and reasonable net stranded benefits. The standard for the recoverability of stranded costs - the "just and reasonable net stranded costs" standard -- was established by ch. 633 of the 1998 Acts of Assembly (HB1172). Proposed Section 56-591.1 would require the State Corporation Commission to determine and establish methods to produce "just and reasonable rates" to allow a utility an opportunity to recover such costs or return to its customers such benefits.
Before any such recovery or return would be allowed, the Commission first would be required determine that the utility will not be able to influence unduly the price of electricity. That is, before the public utility could recover stranded costs (or be required to pay stranded benefits) resulting from retail competition among generation suppliers, the Commission first would determine that competition actually exists, i.e., that the utility lacks market power.
Traditionally, the Commission (like utility ratesetting bodies in other jurisdictions) has set "just and reasonable rates," balancing the interests of the utility and its customers. Use of the "just and reasonable" standard is intended to continue this approach.
For a particular utility, retail competition among generation suppliers may mean that the value of some of its generation units or commitments may increase while the value of other units or commitments may decrease. Hence, to ensure that the utility does not recover a windfall -- or, conversely, bear an unreasonable and unfair burden -- proposed Section 56-591.1 makes clear that it is necessary to "net" the costs and benefits of all of the utility's generating units and all of its commitments to purchase generation capacity from other suppliers in order to produce the utility's just and reasonable level of stranded costs or benefits.
Stranded costs and benefits may be calculated using actual market values for generation-related assets and commitments, or they may be calculated on the basis of estimates, which typically involve the use of computer models. Estimates of market values depend heavily upon numerous assumptions about the future, including, in particular, long term estimates of future market prices for generation capacity. The results of such predictions are highly sensitive to the underlying assumptions, with wide swings in the results depending upon the assumptions used. Many past estimates have proven to be wide of the mark.
Accordingly, proposed Section 56-591.1 defines just and reasonable net stranded costs and benefits in terms of the Commission's determination of actual market values resulting from the sale of such assets or obligations. That is, the Commission would determine both (1) the difference between the embedded net investment in the utility's own generating units and the market value of such units, and (2) the difference between the utility's fixed, verifiable, non-mitigable obligations to purchase generating capacity from other power suppliers (such as non-utility generators) and the market value of such obligations. Market values in both cases would be determined according to the results of "arm's length" sales - e.g., transactions between non-affiliated companies. Sale of all or part of a utility's interests in such units and obligations would be required to determine such market values.
As indicated, in setting rates, the Commission balances the interests of the utility's investors with those of its customers and the public. In striking that balance, the Commission may consider the utility's own actions in promoting public policy, the extent to which the utility has operated efficiently, and other appropriate factors. Proposed Section 56-591.1 enumerates several of these factors, again with the intent of reflecting traditional ratemaking principles.
The utility, which possesses the bulk of the relevant cost and other technical information, normally bears the burden of proof in ratemaking. Proposed Section 56-591.1 would retain this approach.
Section 56-593. Commission Authority to Require Divestiture
A. Beginning January 1, 2002, if the Commission determines that a public utility's ownership of generating assets may permit it to influence unduly the price of electricity, the Commission may issue an order requiring the utility to sell such generating assets, or interest in such generating assets, as the Commission determines to be necessary to remove the public utility's ability to exercise such influence, and the public utility shall sell such assets according to the conditions described in such order.
B. If the Commission issues an order requiring the sale of generating assets pursuant to this subsection, the sale of such assets shall occur over a period to be determined by the Commission, but such period shall not exceed three years.
C. The Commission may impose conditions on any sale by a public utility of generating assets under this section to promote competition in the generation of electricity and the public interest, including conditions to ensure that any buyer or group of buyers is not able to influence unduly the price of electricity and to ensure that the public interest is served in such sale. A sale of generating assets shall not become effective without the Commission's approval.
DRAFTING NOTES
Proposed Section 56-593 ("Commission Authority to Require Divestiture") is intended to permit the SCC to reduce the market power of public utilities. If the SCC determines that a public utility's ownership of generating assets may permit it to influence unduly the price of electricity, then the SCC could order the utility to sell such interest in such assets as the SCC determines to be necessary to remove the utility's ability to exercise such influence.
The period over which the sale would take place would be determined by the SCC, but the period could not exceed three years. The three-year limitation is intended to provide a reasonable period for such sales to occur while removing any implication that a sudden sale of a utility's interests in generating assets (i.e., a "fire sale"), which carries the potential for depressing the market price of such assets, is required.
A key provision is Section 56-593.C, which permits the SCC to impose conditions on such sales in order to promote competition and the public interest. For example, proposed Section 56-593.C specifically would permit the SCC to impose conditions on a sale that would prevent a buyer or group of buyers from exercising market power after the sale. As is the case under current law (Va. Code Section 56-88, et seq.) proposed Section 56-593.C would make it clear that a sale of generating assets is not effective without the Commission's approval.